Van Dyck Law, LLC is a full service Estate Planning & Elder Law practice. They write about comprehensive planning in the areas of wills, trusts, powers of attorney, medical directives, Elder Law and probate & estate administration.

Tax Planning

12/05/2018

“Roth IRAs must still follow many of the same rules as traditional IRAs, however, including restrictions on withdrawals and limitations on types of securities and trading strategies.”

Roth IRAs are very popular. You pay taxes on the contributions today, and then investors can avoid paying taxes on capital gains in the future. It’s a really smart strategy, if you believe your taxes are likely to be higher after you retire.

In Investopedia’s article,“Trading Options in Roth IRAs,”the use of options in Roth IRAs and some important considerations for investors are examined. Unlike stocks themselves, options can lose their entire value, if the underlying security price doesn’t reach the strike price. This makes them much more risky than the traditional stocks, bonds, or mutual funds that are typically in Roth IRA retirement accounts.

Although risky, there are situations when they might be good for a retirement account. Put options can be used to hedge a long stock position against short-term risks, by locking in the right to sell at a certain price. Covered call option strategies can be used to generate income, if an investor is okay selling her stock.

Many of the riskier strategies in options aren’t permitted in Roth IRAs, because retirement accounts are designed to help individuals save for retirement—not become a tax shelter for risky speculation. Investors should understand these restrictions to avoid issues that could have potentially costly consequences. IRS Publication 590 has several of these prohibited transactions for Roth IRAs. The most important is that funds or assets in a Roth IRA can’t be used as security for a loan. Since it uses account funds or assets as collateral by definition, margin trading usually isn’t allowed in Roth IRAs to comply with the IRS’ tax rules and avoid any penalties.

Roth IRAs also have contribution limits that may prevent the depositing of funds to make up for a margin call, placing more restrictions on the use of margin in these accounts. In addition, the IRS rules imply that many different strategies are off-limits, such as call front spreads, VIX calendar spreads and short combos. These all involve the use of margin.

It’s also important to note that different brokers have different regulations, when it comes to what options trades are permitted in a Roth IRA. The brokers permitting some of these strategies, have restricted margin accounts, where some trades that traditionally require margin are permitted on a limited basis.

The use of these strategies also depends on separate approvals for certain types of options trades, based on their complexity. Therefore, some strategies may be forbidden to an investor regardless. Many of these applications require that traders have knowledge and experience as a prerequisite to trading options, in order to reduce the likelihood of excessive risk-taking. Roth IRAs aren’t usually made for active trading, but experienced investors can use stock options to hedge portfolios against loss or generate extra income. These strategies can help improve long-term risk-adjusted returns and reduce portfolio churn. You should guard against using options as a mere speculative tool in these accounts, in order to avoid potential issues with the IRS and assuming excessive risks for funds designed to finance retirement.

People who knew Paul Allen say he had a long-term plan. They say his money has been working in secret for decades now, arguably outside his immediate control. Wealth Advisor’s recent article, “Paul Allen Had A $20 Billion Estate Plan (The IRS Can't Touch)” notes that fact will made it difficult for the IRS to get a share of the estate.

Allen left Microsoft back in the 1980s due to a mild form of lymph node cancer. It was the disease that ultimately killed him.

Allen was rich, so he spent his life engaging in a wide range of interests, like venture capitalism, research, real estate development, yachting, sports and music. His fortune flowed through a holding company. Subsidiaries of Vulcan Inc. ran his investments, as well as his charities, sports teams and high-tech toy collections. Vulcan isn’t a conventional family office, so there’s no division between the principal and his interests on the “family” side and the day-to-day operations on the “office” side. That makes it much harder to separate Allen’s personal estate from his corporate interests. He was sole owner of the company, but the company owned everything else.

The cancer came back 10 years ago. He licked it then, but probably took that as a wake up call to be sure the operations would continue without him. Execs at his company have mentioned his plan for continuity. Therefore, Vulcan will look exactly the same without him, as it did when he was running it.

Vulcan invested billions into reshaping Seattle, purchasing real estate and sometimes selling it for big profits. He owned the local sports teams and a few of the museums. Vulcan also ran the most prominent local movie theater. On the business level, Vulcan was the vehicle through which he bought into the start-up companies that he liked.

Allen was never married, and his sister and her children were his only close family. His sister was a key employee at Vulcan, but Paul kept control and full ownership. She moved to the family foundation side. Her three 20-something children are probably well off, and the older ones have already worked for family businesses. The youngest is still in school. These children will most likely find spots at Vulcan, but whether they ever own the company in their own right is unknown.

While the foundation is too small to own the firm, it could inherit Vulcan. In that situation, the heir isn’t going to pay much of an estate tax on the gift. Allen signed the giving pledge, and handing formal ownership of the firm to the foundation satisfies that objective. Vulcan would continue unchanged, following its founder’s instructions to invest in his interests and fund his causes.

11/06/2018

“Without these important documents, your heirs could overlook financial accounts or miss out on life insurance benefits.”

Who likes to think about death and end-of-life arrangements? Not too many of us, to be sure. However, being prepared for the inevitable is a wise thing to do, and it's a kind thing to do for your family.

US News & World Report’s recent article, “12 Documents to Prepare Now for Your Heirs,” says that when people don't have their paperwork ready, it can be a huge headache for the family. A family can be left with all kinds of paperwork to sort out, while dealing with grief. Even worse, heirs may forfeit life insurance proceeds and tax deductions or overlook accounts they don't know exist. That's why it's critical to have important documents ready for loved ones. Here are the documents you should start preparing right away:

A will. This is a legal document in which you name an executor to carry out your wishes, heirs to receive your assets and a guardian if you have minor children.

A letter of explanation. Your will stipulates how assets are to be divided. However, a letter of explanation can provide the reasons for these decisions. This can be helpful, if the estate is to be divided unevenly between children.

List of financial accounts and beneficiaries. Keep a list of all your finances, such as bank and retirement accounts and brokerage funds. Each may have a designated beneficiary or transfer on death provision, known as a TOD. A person who’s named as a beneficiary or TOD designee automatically will receive ownership of the asset after you die. Make sure you keep these beneficiary designations up-to-date.

Personal inventory. Most wills distribute personal property in vague terms, like designating jewelry to one person and household goods to another. To be certain that nothing significant is overlooked, create an inventory of personal items. This inventory can also list items that may be stored in another location, unbeknownst to your family.

Power of attorney. This form is an important document for your family, if you become incapacitated because of an illness or accident. A power of attorney allows a designated person to make decisions on your behalf. One form is for financial decisions, and another is for health care.

Life insurance policies. Your family can miss significant life insurance benefits, if they don't know you have a policy, or it’s been lost or misplaced. Keep records of your life insurance plans and place it with your financial records.

Real estate records. Add deeds, assessments, mortgage statements and property tax information to the documents you've prepared for your heirs. Collecting the records for them in advance will make their lives easier.

Tax returns. List the name of your CPA or tax preparer, if you have your taxes professionally done. He or she can help your family with filing final tax returns for your estate. If you file your own returns, print a copy for your files and record any login information for online tax preparation services.

Logins for accounts. Create a list of your usernames and passwords for financial accounts, email, and social media and keep it where heirs can access the information.

A digital estate plan. Some states recognize digital estate plans as legally binding. However, even if it isn’t, it can be a great resource for your family. A digital estate plan states what will happen to your digital assets, like your social media accounts, websites, digital photos, intellectual property and other files and documents. Within your plan, you can name a digital executor and list those you've named as legacy contacts on specific platforms, such as Facebook and Twitter.

An ethical will. This letter describes what you'd like remembered as your legacy, such as passing down values. An ethical will can be used to share memories or to impart wisdom.

Your final wishes. If you've made prearrangements for your funeral or cremation, place that information with your will and other end-of-life documents. Your final wishes should also include information about organ donation, pet care and who should be notified of your passing.

It’s a big job to nail down these 12 tasks but getting them completed will be a wonderful final parting gift for your family.

If parents transfer their home to a child, the child can keep the current assessed value and annual property tax. The transfer can be either while the parents are living or in their will. If the transfer is an inheritance, and the child keeps the low property tax base, the child will still receive the stepped-up basis and avoid a substantial capital gain, when the home is eventually sold.

In other words, if parents give their home to their child as an inheritance, can the child have both the continued low property tax and the stepped-up basis? Yes, provided the property is transferred at the parent’s death. If it’s transferred while the parent is still alive, the child will receive the property tax break. However, he or she will not get the step-up in basis, which is a huge tax break for highly appreciated homes.

People frequently confuse “property tax base” and “cost basis,” and property taxes with income taxes. They’re entirely separate systems. Property taxes are governed by state law. Cost basis, capital gains and the step-up in basis are part of the income tax system.

Under the income tax system, the cost basis in your home (if you’ve never rented it out) is generally what you paid for it, plus the cost of major improvements. If you sell your home for more than its cost basis, the profit is taxed as a capital gain. If you’ve used the home as your primary residence for at least two of the past five years ending on the sale date, the first $250,000 in capital gains, or $500,000 for married couples, is tax free. If you retain your home until death, your heirs could receive an even greater capital gains tax break.

When you pass away with appreciated assets, including a home, their cost basis is “stepped up” to the market value on your date of death. Your heirs inherit the assets with their new, stepped-up cost basis. This will eliminate any taxes on the appreciation that happened in your lifetime. If your heirs sold these assets immediately, they’d owe little or no capital gains tax.

Unlike the property tax break, this capital gains tax break is only for inherited property. If you give your home to a child while you’re still alive, the child takes over your cost basis and loses the stepped-up basis. In addition, if you give your child all or part of the home while you’re alive, you’ll have to file a gift-tax return for the value that exceeds the annual gift tax exclusion. Although you probably won’t owe gift tax on the home’s value, it will be subtracted from your combined lifetime gift and estate tax exemption, which is $11.18 million for any person who dies in 2018, or $22.36 million for a couple.

10/03/2018

“A new survey conducted by LifeWay Research for the Southern Baptist Foundation found more than half of Southern Baptist pastors, overall, do not have a will, trust, living will, electronic will, legacy story or durable power of attorney with health care directives.”

However, executives at LifeWay Research say the survey shows a lack of awareness about estate planning and the laws which may be factors in pastors not having a plan in place. Procrastinating is common, but failing to have an estate plan in place can have a devastating impact on an estate.

Of course, basic estate planning saves a lot of trouble for family and loved ones. However, in addition, taxes can be minimized and assets protected.

According to the survey, pastors age 18-44 are the least likely to have a will (31%) or a durable power of attorney with health care directives (14%). Only about half of those pastors closest to retirement (age 55-64 and 65-plus) have a will (54% for both groups). Likewise, few of those closest to retirement (age 55-64 and 65-plus) have a health care durable power of attorney (25% for both groups).

It’s a bit of a surprise that so many pastors don’t have a plan for their families and property after their death, especially those that should be most likely to be thinking about this issue—the ones with young families. They seem to be the least prepared.

About 64% of the clergy surveyed, agree with a statement that the court decides who will care for a child, if the last parent dies without a will; 16% percent disagree, with 21% saying they didn’t know. When asked about assets, the survey showed that 48% of pastors said that if someone dies without a will, their family decides what happens with the assets of the deceased; 33% disagree, and 19% "don't know."

However, both with property and children, the court decides what happens to them, if there’s no will.

These estate planning questions were part of a mail and online survey of pastors conducted between April and June 2018. The mailing list was randomly drawn from a list of all Southern Baptist churches and included more than 1,100 completed surveys.

09/27/2018

“The president's plan aims to reduce “regulatory barriers” to MEPs. It also seeks a review of RMDs.”

President Trump signed an executive order, instructing the Labor Department to relax rules on small-business Multiple-Employer Retirement plans (MEPs) and telling the Treasury Department to look at Required Minimum Distributions (RMDs) from 401(k)s and IRAs.

Trump went on to say that this would provide “retirement security to countless American workers and their families. We believe all Americans should be able to retire with the confidence, dignity and economic security that they want.”

Trump explained at the signing that the “complexity of current federal regulations makes it extremely difficult for small businesses to afford retirement savings accounts for their great employees. While large companies can afford to deal with these burdensome regulations, small companies just can’t handle it.”

“This means that 50% of Americans employed at small businesses with fewer than 100 employees, don’t have access to 401(k)s or other retirement plans,” he said.

For this reason, Trump said he’s lowering the costs of retirement plans, so they can become an affordable option for businesses of all sizes. “Small businesses”, Trump said, “will no longer be at a competitive disadvantage and small business workers will now be treated more fairly and have more choices.”

Trump said his executive order decreases the “regulatory barriers,” so small businesses are able to create “low-cost association retirement plans,” also called multiple employer plans, or MEPs. The IRS requires savers to begin taking RMDs, calculated on the basis of life expectancy, at age 70½.

08/31/2018

It was common to get a pension when you worked for a company for 20 or 30 years, then retired with a gold watch and a complete package of retirement benefits.

Investopedia’s recent article, “Choosing How and When to Receive Pension Benefits,” reminds us that times have changed. Pensions have been replaced in large part by 401(k)s or other employer-sponsored savings plans. Those fortunate enough to still have a pension, will make it a large part of their retirement plan. If you have a pension, you’ll have to make some decisions when you are ready to retire.

The first choice is when to begin receiving pension benefits. Some plans offer payout options that like Social Security benefits. You can begin receiving benefits at 62, but you’ll get a smaller amount. If you wait until you’re 65, you’ll receive a bigger payout.

A critical decision is how you will receive your benefit payment. Many pension plans have a lump sum option that lets you cash out of the plan. You’ll also most likely have a few options for monthly payments. The lump sum payout avoids the possibility that your employer may default on your pension.

Most people who take a lump sum roll over the proceeds into an IRA, so they can control the tax consequences of the distribution. If you don’t take a lump sum, or if your plan doesn’t allow for one, you’ll need to decide how to receive your monthly payments. There is typically an option of receiving payments for the rest of your life (a single life annuity) or selecting from a variety of survivor options (joint and survivor annuity) that allow for your beneficiary to continue to receive payments after your death.

If you choose payments for your life only, your monthly income will be higher. The survivorship options result in a reduced payment. If you are married, the IRS requires that the benefit from a qualified retirement plan be paid out as a survivorship option, unless both spouses designate a different form of payment. The best choice for you will depend on your personal circumstances.

When trying to decide, weigh factors such as your age, your spouse’s age, each of your life expectancies, your health, your health history, your spouse’s health and health history, along with the other sources of retirement income that might be available to you or your spouse, after one of you passes. It’s also important to consider whether you have life insurance, the impact the death of one spouse will have on your combined income and the impact on your combined expenses.

If you are lucky enough to have a pension, make sure to get this right. You won’t get a second chance, once you start getting your benefits.

08/07/2018

The “sandwich generation” is a generation of people, who are usually in their 30s, 40s and 50s. They are caring for their aging parents, while supporting their own children. If this sounds like you, then this means you’ve got a lot to worry about. Even if you are not taking financial responsibility for your parents, you are dedicating time and energy, usually willingly. However, that means there’s less of both for you, your family and your career.

Talk About Money Issues. Discuss finances with your children and parents. Perhaps you could go with them to meet with their estate planning attorney. He or she can make sure your parents have all the proper estate planning documents, such as a will, trust, living wills and powers of attorney.

This legal professional will create a plan to lessen or avoid estate taxes and work to ensure that your life's savings and assets are protected from your beneficiaries' creditors after your death, and that your legacy is assured.

Estate planning attorneys are accustomed to working with families and navigating the issues between adult children and their aging parents. There is little chance that yours is a unique situation. It does not mean it is easy, but a skilled attorney will be able to help you and your family deal with whatever situation you face, with dignity and compassion.

Get (More) Help. You may get support or assistance to help your parents, your kids, or even yourself. Odds are good that your parents will be reluctant to accept help, so start the process yourself. This could involve hiring a housekeeper for yourself to free up some of your time for things that are more important.

This will give you more time, and your parents won’t feel you are using your finances to assist them. If you have friends and relatives that offer help, take them up on it. Don’t try to do everything yourself.

If your children are old enough, you can also get them involved. Children are surprisingly capable, and sometimes grandparents are more comfortable having grandchildren help with minor chores around the house, where their children’s own actions may seem intrusive.

3.Don’t Feel Guilty. It’s impossible to get to everything. Be sure to take it one day at a time and to take care of yourself.

07/30/2018

“There is a silent killer of many businesses in the United States, and our area is certainly not immune.”

Statistics say that about 80 to 90% of U.S. businesses are family-owned. However, less than a third will survive into the second generation, with just one in ten making it to the third.

KRCU’s recent article, “Business Succession Planning is Very Important,” reminds us that business succession planning is a process in which business owners research and consider a strategy to move forward in the event of death, illness, or simply transition.

Business succession planning implements several estate planning strategies. There is no “one size fits all” plan. A business owner should carefully consider his or her options. Without a plan in place, there’s a good chance for failure.

There are several factors to be examined. There are questions like estate taxes, liquidity, ownership percentages, family disagreements and the management capabilities of those relevant individuals.

The uncertainty of a transition can impact the business internally among staff and externally with customers. As a result, it’s vitally important to create a business succession plan and communicate that plan to your team and family.

There are many succession planning vehicles and succession planning concerns. Seek the advice of an expert on these matters and do it sooner rather than later. Work with an experienced estate planning attorney, who can walk you through the issues that must be addressed.

Many experts think that business succession planning is at least as important (and maybe more important) than individual estate planning.

Your employees, customers, and family members are trusting you to create a smooth transition. Don’t disappoint them.

07/04/2018

“Are you considering working, while collecting Social Security as part of your retirement? Even if you're thinking about occasionally working part-time, when it comes to working and earning Social Security, you've got to be careful.”

If you work while collecting Social Security, you need to be aware that if you start earning too much money at work, your income might be decreased. You might also end up paying more taxes for your Social Security benefits.

Investopedia’s recent article, “How Working Affects Your Social Security Benefits,” says that when you’re retired, if you claim at your full retirement age (FRA), you are entitled to receive 100% of your benefits from Social Security (that age varies based on your year of birth). Those individuals turning 62 in 2018, will be able to fully retire at 66 and four months and begin collecting Social Security.

But claiming benefits early means you get less in Social Security income each month, than if you had waited until your FRA. Therefore, if you can wait until full age, or even later, it may be wise. For every month you claim before the full retirement age, the monthly benefit you receive will go down by a fixed percentage. You could claim an income that is about a third less, than if you would have waited. Claiming early and earning too much, means the amount you receive later may be reduced even more. This year, people who earn more than $16,920 will have a dollar held back for every two earned above the limit.

In 2018, your earnings can go to $17,040, and you won’t have your benefits impacted. Hitting your FRA and claiming in 2018 means you can earn $45,630 without a reduction in benefits. The reduction won’t be spread out over the year. Monthly benefit payments will be stopped, until the amount reduced is covered and then you’ll begin receiving your monthly checks again.

Because there’s no pro-rating, you won’t get income from Social Security until the amount is covered. The rest of the checks will then begin coming each month until the end of the year, with any extra money withheld paid back to you the following year. It is not forfeited, but added into your benefit calculation to up your benefit when you hit FRA.

The income limit on working only applies, if you’re younger than full retirement age. Folks who’ve already reached FRA can earn as much as they want, and it won’t reduce the benefits they get. The limit only applies to work earnings, not the money you gain from investments, annuities, pensions, etc. For those who are self-employed, Social Security will base their income on their net earnings.

The IRS calculates how much of your benefits will be taxed, based primarily on your adjusted gross income. To see if you will be taxed on your benefit, add half of your expected income to your other income and tax-exempt interest. If that’s more than $25,000 for you alone or over $32,000 for a married couple, some of your benefits will be taxable. If it’s more than $34,000 for you or $44,000 for a married couple in 2018, you may fall into the 85% social security tax bracket.

People keep working in retirement to keep busy, earn more or supplement their benefits. However, if you claim benefits early or work after reaching full retirement age and receiving benefits, consider what you earn and how it may impact your benefits.